Working Papers

Betting on the RBA

Someone was betting big on the outcome of today’s RBA Board meeting:

a Centrebet regular, has staked just short of $30,000 on the Reserve Bank sitting on its hands.

If at 2.30pm the bank announces its board has decided to keep rates on hold, he will walk away with a profit of $21,000. If it puts rates up, he will say goodbye to $29,500.

‘‘He is very confident. He placed four separate bets, continuing to pile in as the odds went down,’’ said Centrebet’s Neil Evans.

‘‘Another punter staked $5000 on there being no change, another $3500.

‘‘It’s the house against the punters. I am hoping they don’t know something I don’t.’‘

They didn’t.

posted on 02 March 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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I think this kind of relates to your earlier post on the discrepancy between ipredict and the IB’s.

There was a bit of an arbitrage play that went something like this: sell the March IB and put a bet on “no hike” which was paying $2.10 on Monday.

The March IB was trading Monday mostly at 96.11, with a breakeven for a hike at 96.015 and 96.25 for no hike.  So you sold the IB at 96.11 and put $189.52 (per IB contract) on “no hike” at centrebet at $2.10.  You stood to gain $237.50 (i.e. 9.5 ticks times $25 per tick) on the IB if they hiked but you lost your $189.52 outlay at centrebet = $47.98 profit.

On a no hike from the RBA, you lost $350 on your IB (14 ticks times $25 per tick) but were paid $2.10 times $189.52 ($397.98) on your centrebet bet = $47.98 profit.

The article says it was a “financial type” or some such who was putting the bets on, so I suspect someone was wise to this and cleaned up.

Of course, my little example excludes transaction costs and doesn’t take into account the world could have ended and the RBA hiked or they may have done +50bps. Both were low enough probability to not worry about in my opinion.

This happened when they were cutting rates (i.e. arbitrage opportunity) but they wouldn’t take large bets.  I’d be surprised if this type of thing happens again given they took large bets this time (although tiny in comparison to the IB market).



Posted by .(JavaScript must be enabled to view this email address)  on  03/02  at  08:00 PM

actually “no hike” was only paying $1.63, which means you would have to put on $223ish with centrebet, and your profit would only be $14ish dollars per IB contract sold.

still arbitrage and worth it on a scale mentioned in the article.  $30k worth of bets would imply something like 134 IB contracts which would be $1883 “free money”.

Posted by .(JavaScript must be enabled to view this email address)  on  03/02  at  09:18 PM

An arb player certainly makes sense, as I can’t imagine anyone placing such a large bet when market pricing was close to a coin toss.

Interesting that iPredict had more aggressive pricing than the IBs, although I thought IB pricing was more realistic ex ante.

Posted by skirchner  on  03/03  at  09:05 AM

ipredict had no volume. it averaged $1000 a day.

Posted by .(JavaScript must be enabled to view this email address)  on  03/04  at  02:37 AM

That’s not bad vol by prediction market standards.  A notable feature of these markets is that you don’t need much volume to get reasonable pricing.  They also have an automated market maker and keeps spreads fairly narrow.

Posted by skirchner  on  03/04  at  10:08 AM

I’m not familiar with prediction markets accuracy.  Simply pointing out that it’s trivial to push a market off its ‘equilibrium’ price with a daily volume 100 times this.

Posted by .(JavaScript must be enabled to view this email address)  on  03/10  at  03:11 PM

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